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Karen Selick

The Buy-Locally-Owned Fallacy

Karen Selick*

 
"What if I have bought the sweater via eBay from a vendor in Hong Kong? I will have sent my money out of the community, but I will still be happier. There will be less money in Belleville, but more human satisfaction here, because I value having the sweater more than I valued having the money."
An advertisement appears regularly in the newspaper in my community (Belleville, Ontario, Canada) sponsored by a group of local businesses. It reads: "Buy locally owned. Your money stays in the community. Think about it—everybody wins."

As instructed, I have thought about it. In fact, I have probably thought about it a lot more than the advertisers expected me to. My conclusion is that their advice is wrong and that Belleville residents (or any other group) that followed their recommendations would find themselves losing, not winning, for having done so.

What's So Great about Keeping Money in the Community?

There are several fallacies embedded in the advertisers' advice. To see them clearly, it helps to isolate and examine them one by one. I'll start with the idea that keeping money in the community is necessarily a good thing.

One way people could keep money in the community would be to become misers, hoarding cash under their mattresses or just letting money accumulate in their bank accounts, and buying nothing except the most basic necessities to ward off starvation and frostbite. While practicing frugality might make consumers feel temporarily virtuous during tough economic times, it wouldn't make local businesses happy because they would lose sales. And eventually, consumers used to a more comfortable lifestyle would find this Spartan existence dreary. Misers aren't noted for being happy people. In fact, that's where the word "miserable" comes from. Thus, merely keeping money in the community can be a "lose-lose" proposition.

But encouraging miserliness clearly isn't what the advertisers intended. They want Belleville residents to use a different method of keeping money in the community—namely, spending freely, but only on goods and services offered by other Bellevillians, including the advertisers themselves.

There is a kernel of wisdom here, but it comes coated with a mold of folly. The smart part is the recognition that trade tends to improve people's lives.

Every time we, as individuals, spend money, we exchange it for something that we expect to give us greater satisfaction than the money would. If this were not true, we would just keep our money and walk away from the proposed deal. Sure, we may grumble about a gasoline price that's higher than it was the previous week, but when we consider the consequences of not having gas in our cars—the inability to go places—we conclude that, all in all, we are better off with a tankful of gas and less money than with an empty gas tank and more money.

Trade, therefore, increases human satisfaction. I will have less money after I buy that gorgeous sweater I've been hankering for, but my overall happiness level will have increased. Assuming (as the Belleville advertisers do) that community satisfaction can somehow be aggregated and measured, my sweater purchase will increase my community's well-being because the community will contain one slightly happier individual.

But what if I have bought the sweater via eBay from a vendor in Hong Kong? I will have sent my money out of the community, but I will still be happier. There will be less money in Belleville, but more human satisfaction here, because I value having the sweater more than I valued having the money. And, having purchased it on Ebay, chances are that I parted with less of my money to obtain it.

It is therefore possible to send money out of the community and still have a win-win scenario. Even if nobody else in the community engaged in any transactions at all, other members of the community—besides me—are nevertheless likely to be a tiny bit better off due to the expenditure of my money outside the community—whether from encountering a happier Karen Selick as I interact with my fellow townspeople, or from sharing the sight of my pretty sweater as I wear it around town.

Whose Satisfaction Matters More?

So far, I've shown that (a) keeping money in the community can result in the entire community losing, and (b) sending money out of the community can result in the entire community winning. The advertising slogan isn't standing up very well to logical testing.

But undoubtedly the advertisers would argue—regarding my sweater, for example—that the local community would have gained even more if I had purchased it from a Belleville shop rather than from a Hong Kong internet merchant. They would contend that not only would Karen Selick's satisfaction have increased, but so would the satisfaction of Mary Jones, a Belleville shopkeeper, who has been hankering to sell me the sweater as much as I've been hankering to buy it.

If I accepted this argument and henceforth bought all my sweaters from Mary Jones, would that increase the satisfaction of the Belleville community as a whole? No doubt Mary Jones would be happier, but what about me?

It depends on what Mary Jones and all the other Belleville clothing-shops owners have in their inventory. If there's nothing I like in the Belleville shops as much as the merchandise available from foreign vendors on eBay, then I would actually lose satisfaction from restricting my commerce to local merchants.

So, Mary Jones would be happier if I bought locally, but Karen Selick would be less happy. How do we know whether the net happiness of the entire community has increased or decreased? Of course, we don't. There are no units with which we can measure or compare personal happiness. I can't say that buying the Hong Kong sweater would increase the feeling of satisfaction in my brain's pleasure center by 17 dopamine droplets, while my top pick among available Belleville sweaters would produce only 12. Even if I did my best to quantify my own satisfaction in numerical terms like this, there would be no way of knowing whether the nine dopamine droplets that Mary Jones might receive from my transaction with her would be worth more or less to the community than the five dopamine droplets I would forego by purchasing from her. For starters, are our dopamine droplets the same size? But, more important, do the pleasure centers in our brains respond equally strongly, even to droplets of the same size?

More Choice Can Mean More Satisfaction

The sweater example demonstrates a second fallacy built into the advertisers' assumption—namely, the presumption that shoppers can buy exactly the same things here in Belleville that they can buy elsewhere. Since Belleville is a relatively small community—about 50,000 people—this simply isn't true.

Two hours away by car lies Toronto, a city of about three million people that offers an immensely greater variety of shopping options. There are "upscale" stores for customers who want the very highest quality. There are import stores for those who are bored with Canadian merchandise. There are specialty stores where every imaginable specimen of a single item—for instance, ribbon—is available under one roof. With such a wide range of choices, the probability is high that Belleville shoppers who are willing to take the time to visit Toronto will find things there that they like better than what they'd find in Belleville. And these days, even shoppers who don't want to travel can find a much wider selection of merchandise on the internet than they can find locally.

So, there's a good chance that shoppers who restrict themselves to buying locally are foregoing many opportunities to increase their satisfaction.

Saving Time Can Mean More Satisfaction

Furthermore, websites like eBay offer not only more choice, but also greater convenience. In a tiny fraction of the time it would take to scout out the wares of two or three local stores, shoppers can type a few keystrokes into a search engine and see what's available all over the world.

Some people get pleasure from the old-fashioned shopping experience. They enjoy browsing in a variety of stores, physically handling and comparing merchandise. It's a form of entertainment. For this group, the time saving of internet shopping is no benefit. But other people consider the physical traveling aspect of shopping to be an annoyance. For them, the speed of online shopping provides yet another reason for not buying locally. Even if Belleville vendors offered exactly the same selection of merchandise that can be found online, at the same prices, the second group would, in many instances, find it more advantageous to send their money elsewhere, simply because they can reduce their shopping time this way. And again, it will be impossible to weigh the satisfaction this group derives from saving time against the dissatisfaction local merchants might experience from losing their business.

Saving Money Can Mean More Satisfaction

Online shopping also makes it easier to find the lowest price for identical merchandise. Even when Belleville merchants offer exactly the same products as their non-local competitors, they don't always have the lowest prices. If a Belleville resident can get the sweater she wants more cheaply by sending her money out of the community, she'll have more money left to satisfy other desires. Maybe she'll use her savings to buy dinner at a local restaurant one more time than she would otherwise have done. The Belleville clothing stores may be less happy that she sent sweater money out of the community, but the Belleville restaurant will be happier that she did so.

Let's weigh the choices. On the one hand, there would be a consumer who purchased only a sweater, and a happy clothing store. On the other hand, we have a consumer who purchased both a sweater and a dinner, and a happy restaurant. Which happiness combo is a bigger win for the community? Obviously, nobody can answer this question, especially not when we are considering only one or two isolated transactions.

But when similar sets of choices keep cropping up, hour after hour, day after day, for every member of the community, you can't help suspecting that Bellevillians would be better off, cumulatively, if we shopped for the best bargains we could find, anywhere in the world, and then spent our savings buying extra things. The extras might be additional tangible items from abroad, or they might include more services—restaurant meals, theatrical performances, car washes, beauty treatments, or personal fitness training, among others—that we might very well decide to buy locally. After all, if outsiders are willing to send stuff into Belleville really cheap, why shouldn't we scoop it up?

Even Belleville merchants should see the logic in this because they, too, are consumers. Their ultimate goal is not simply to sell as much inventory as possible. Selling things is merely the means to an end. Their ultimate goal is to produce for themselves and their families the most satisfying life possible. If they can do this by purchasing what they need more cheaply from outside the local area, they should. And, in fact, they do.

But this should also make them realize that they, in turn, will have to compete to win traffic from customers, both local and non-local, by offering some advantage that people can't get elsewhere. Maybe the advantage will be a lower price. Maybe it will be more-attentive service. Maybe it will be novel merchandise, or superior merchandise, produced by local artisans. Maybe the Belleville merchants themselves will have to set up websites to offer customers from both inside and outside Belleville the same shopping convenience that distant competitors provide.

But the one method they probably shouldn't try is making local people feel guilty or disloyal to their communities for not patronizing them when it's not in their best interests to do so. Sadly, once the illogic of the ads is exposed, guilt is pretty much all that's left to rely on.

What If Every Community Thought Like This?

A couple of other logical questions come to mind whenever I see the "buy local" advertisement. Do the Belleville advertisers really think that they can keep their "win-win" formula a secret from merchants in other communities if it actually does the trick of making the community more prosperous? What would happen if merchants in other communities started copying Belleville's formula for "success"?

Forty minutes' drive from Belleville lies the town of Picton—population: 3,500. Pictonites frequently drive to Belleville, to work, shop, dine, or be entertained.

Suppose the Picton business association published "buy local" ads in the Picton newspaper. And suppose that Pictonites followed their advice. They would stop shopping in Belleville, in order to keep their money in Picton. Belleville businesses would suffer.

Many other outsiders normally spend money in Belleville. Some are residents of other small communities who travel here to shop because of the greater variety it offers, just as Bellevillians sometimes travel to Toronto. Some are tourists who come here as a vacation destination. Some are merely passing through to make a pit-stop on the journey between Toronto and Montreal.

What makes the advertisers think that the money flowing out of Belleville from locals who shop abroad is greater than the money flowing into Belleville from outsiders who shop in Belleville? Why are they willing to risk losing the business of all the outsiders who routinely shop in Belleville by suggesting to them that they should feel disloyal for not patronizing the folks back home? Why are they willing to risk that merchants in other communities will imitate their ad campaign and cut off the flow of outsiders' dollars into Belleville?

Indeed, the "buy local" fad is already not unique to Belleville—not by a long stretch. A Google search reveals that there are many communities, some close to Belleville and some thousands of miles away, that also encourage their residents to buy locally—and by implication, not to buy from Belleville merchants.

"Buy Local" Is Just a Scaled-Down Version of Protectionism
 

For more on protectionism, see Protectionism, by Jagdish Bhagwati, in the Concise Encyclopedia of Economics.

This widespread fad is really a microcosmic and non-coercive version of the political phenomenon known as "protectionism." Protectionists usually advocate limiting, by the threat of government force, the importation of goods between countries or imposing tariffs to make imports prohibitively expensive. Just like the Belleville advertisers, they argue that creating a captive market for their country's business community will somehow increase the prosperity of the entire country. There is abundant empirical evidence that protectionism actually reduces a country's overall prosperity rather than increasing it, but new generations of politicians and commentators have to be taught this lesson over and over again.

If we extrapolate the protectionist argument even further—starting from the national level, moving down to the small-town level, and then beyond—we should conclude that we would all be better off if we bought "super-locally"—that is, if we traded only with people on our own block, or better yet within our own household. Imagine the slogan: "Buy only from your immediate family. Your money stays in your own household. Everybody wins."

This advice, obviously, is ludicrous. Every household would have to grow its own food, make its own shoes, perform its own appendectomies, and so on. We would have to forego all the advantages of trade: the specialization of labor and the economies of scale. We would all be immensely worse off.

Focusing our lens back out from the household level to the small-town level, we can see the same principles at work. The more we restrict ourselves from taking advantage of the skill, knowledge, talent and creativity the rest of the world has to offer, the more we harm ourselves.

Those Nasty Outside Suppliers and Giant Corporations

The efforts of Belleville's Buy-Locally-Owned Group don't end with newspaper and bus ads. The group also has a website where it attempts to amplify on the advantages of buying locally. What are its arguments?

First it says, "Your money stays in the community, instead of leaking away to outside suppliers and corporate headquarters." We have already examined the fallacy about keeping money in the community, so now let's consider those dastardly outside suppliers and corporate headquarters.

The website also contains a list of the "buy local" group members. Curiously, many businesses on the list don't seem to follow the group's own principles. For instance, at least ten members are either franchises or branches of major international chains—Holiday Inn, Culligan and Dairy Queen, to name a few. One member, Canadian Tire, is part of a corporation with 473 stores and $4.4 billion in market capitalization. Its most recent investor fact sheet describes it as "Canada's most shopped general merchandise retailer."

Even if these member businesses are locally owned franchises, they must be sending royalties regularly to a corporate headquarters somewhere else. That's how franchises work. Those head offices aren't in Belleville. And the local franchises are probably buying most, if not all, of their supplies through the head office, to take advantage of its bulk purchasing power. That, too, is how franchises generally work. That's what keeps the chain's products uniform throughout all its locations. It also keeps the chain's prices low. While these international chains may, in fact, buy some supplies produced in Belleville, they certainly don't buy everything here. The ice skates I bought last year at Canadian Tire, for instance, say "Made in China" on them. This means that even while Belleville money is "leaking away" to outside suppliers, the very people responsible for the "leak" are sweet-talking Belleville consumers into believing that it won't happen.

Even the businesses that aren't franchises or branches—for instance, the two independent opticians on the list—allow Belleville money to "leak away." I've shopped in both stores. Like opticians everywhere, they carry eyeglass frames from famous designers. Those designers don't live in Belleville. The eyeglasses I'm wearing right now, for instance, (purchased from one of those local opticians) say "Made in Italy" on the frame.

What is the powerful cachet about local commerce that makes these businesses so willing to make hypocrites of themselves, advocating one thing while doing the opposite? It may have something to do with environmentalism. Some consumers seem to think buying locally will reduce their "carbon footprint." Or maybe it's an attempt to cash in on consumers' nostalgia for the days when everyone in a community knew everyone else. Whatever the case, the advertisers are selling an illusion.

In fact, if customers really believed that local stores stocked only local merchandise, many of the advertisers would lose customers in droves. I bought my eyeglasses in Belleville only after discovering I could get the same broad selection of fashionable, internationally produced frames that I would find anywhere in the world. Had I thought there would be only a pedestrian selection of Belleville-produced frames, I would have shopped in Toronto.

These Guys Sound Just Like the Government

The Belleville Buy-Locally-Owned Group also argues: "Local businesses give generously to community events, charities and sports teams that improve our quality of life."

This may be true, but so do businesses that are not locally owned. They, too, recognize the goodwill that such donations generate for their businesses.

Besides, this argument resembles what the government tells us when it taxes us: "We need to take your money away from you so we can spend it on things that benefit your community."

But if the government didn't take so much of our money away, we could spend it ourselves on things that would benefit our community. We might make different choices than the government about how to spend it, but our choices would more accurately reflect the value that different events or charities actually have for us. The same reasoning applies with respect to the "buy local" advertisers. If Bellevillians save money buying from outside vendors on the internet, they will have less need for the charities the local advertisers support, and they will be better able to afford tickets to events and equipment for local sports teams themselves.

Local or Foreign?—Buy What Suits You Best

Don't get me wrong. I'm not advocating that people buy only from large multinational corporations. There are many times when shopping locally will give people greater satisfaction.

In my own case, I buy all of my meat and eggs from local farmers whom I know personally, because I want antibiotic-free, grass-fed products. I trust my suppliers to raise their animals to these specifications, and I'm welcome to go visit their farms and confirm that they're doing so if I wish. In the summer, I get a weekly delivery of organically grown vegetables from another farmer whom I also know personally. I trust her not to use pesticides and to grow the most nutritious vegetables she can. She, too, would welcome me to come visit the farm—especially if I'd volunteer to help her weed, water and harvest, as some of her other customers do.

The point is that shoppers should buy from local suppliers when the positive attributes of the local supplier are more important to them than the advantages of a more distant supplier—whether it be personal service, free delivery, the freshness of the product, the uniqueness of the product or the simple fact that you like the vendor's personality. You throw all those factors onto the scale and weigh them against other factors like price, convenience, and the variety that may be available from more distant vendors. Then you choose what's best for you. People will vary in their decisions because everyone's set of preferences is unique. Sometimes you'll choose the local vendor; sometimes you'll choose the distant one.

 

For a related EconTalk podcast, see Don Boudreaux on the Economics of "Buy Local".

But the last thing consumers should be swayed by are appeals to guilt, to a false sense of community obligation, or to economic arguments that, upon close examination, prove to be full of logical errors. Buy locally or globally or anything in between.


*Karen Selick is a lawyer in private practice in Belleville, Ontario, Canada. She is also a regular contributor to the Comment page of the National Post, one of Canada's major daily newspapers. Her website is at www.karenselick.com.
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